The 2014 GP2 series champion said he would take the opportunity as a challenge to improve.
Palmer joined Renault's predecessor Lotus in 2015 as third driver and did enough to earn a place on the grid this season where he has started 18 races so far earning his first point at Malaysia.
The 2014 GP2 series champion said he would take the opportunity as a challenge to improve despite scoring just one point in 2016 compared to current teammate Kevin Magnussen's seven.
"I'm over the moon to be racing with Renault Sport Formula One Team for a second season and I can't wait to reward the team's faith in me on track," said Palmer.
"I share the excitement of the team looking to 2017 and our new car.
"It's been a steep learning curve driving in Formula 1 and I know that I am performing better than ever, and that there's still more to come," said Palmer, the son of former F1 driver and race circuit owner Jonathan Palmer.
Renault Sport's racing chairman Jerome Stoll said the English driver's enthusiasm and desire to improve were the key factors in the French outfit's decision to retain his services.
"Jolyon understands the team?s spirit and motivates everyone he works with," said Stoll, a 62-year-old Frenchman who has spent his career in various top posts with the French car manufacturer.
Magnussen, meanwhile, has been linked with Haas while Hulkenberg joins Renault from Force India.